Stephan Liozu has studied, researched, and practiced value-based pricing for over 15 years now. That includes training, speaking, consulting, managing pilot projects, and coaching large scale pricing transformations.
In this episode, Stephan highlighted the utmost importance of understanding the value delivered to customers before setting prices, emphasizing a value-first approach to pricing strategies.
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Why you have to check out today’s podcast:
- Learn the significance of focusing on a specific market segment to avoid distractions, streamline operations and increase chances of success
- Find out why you don’t need to excessively customize your products
- Discover why prioritizing value over price can develop to more effective pricing strategies and maximize profitability
“Do the value work first and then worry about pricing. So, value-based pricing is 90% value, 10% price. So, if you want to do that very well, value first, then price.”
– Stephan Liozu
Topics Covered:
02:25 – How Stephan started in pricing
04:13 – Customer segmentation as it relates to value pricing
05:25 – Effective ways of maximizing segmentation
07:17 – Defining customer segmentation and how the SaaS scenario Mark described relate to that
10:16 – Integrating value pricing into customer segmentation
13:03 – What value means to the price buyer
14:11 – How is market segmentation different from customer segmentation?
16:52 – Discussing about product segmentation and taking software for an example
21:28 – The challenge of operationalizing customer segmentation
24:57 – Why focus on one market segment
26:41 – The need to not excessively customize your product
27:42 – Stephan’s best pricing advice
Key Takeaways:
“Pick one market, focus on it, find your ICP, and then get a few logos; see what happens.” – Stephan Liozu
“Do the value work first and then worry about pricing.” – Stephan Liozu
“If you want to do that [value-based pricing] very well, value first, then price.” – Stephan Liozu
People/Resources Mentioned:
- Owens Corning: https://investor.owenscorning.com/
- Thales: https://www.thalesgroup.com/en
Connect with Stephan Liozu:
Connect with Mark Stiving:
- LinkedIn: https://www.linkedin.com/in/stiving/
- Email: [email protected]
Full Interview Transcript
(Note: This transcript was created with an AI transcription service. Please forgive any transcription or grammatical errors. We probably sounded better in real life.)
Stephan Liozu
Do the value work first and then worry about pricing. So, value-based pricing is 90% value, 10% price. So, if you want to do that very well, value first, then price.
[Intro]
Mark Stiving
Today’s podcast is sponsored by Jennings Executive Search. I had a great conversation with John Jennings about the skills needed in different pricing roles. He and I think a lot alike. If you’re looking for a new pricing role, or if you’re trying to hire just the right pricing person, I strongly suggest you reach out to Jennings Executive Search. They specialize in placing pricing people. Say that three times fast.
Mark Stiving
Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the segmented relationship between them. I’m Mark Stiving and our guest today is Stephan Liozu. Here are three things you want to know about Stephan before we start. He is the founder of Value Innoruption Advisors. He’s been running that for 12 years now, I think. got toco-founder of Pricing for the Planet. Fascinating. And believe it or not, he was born in the Pyrenees between Spain and France, and he watched the Tour de France when he was growing up. Welcome, Stephan.
Stephan Liozu
Hey, great to be here. The Tour de France was the moment of the year we all waited for as a kid.
Mark Stiving
What always seems so funny to me about the people watching, the spectators is that there’s this, it’s a three-week race and you get 10 seconds to watch them ride by.
Stephan Liozu
Right, there’s a lot of festivities around that. you have caravans and they throw candies and it’s like a parade. And then eventually the racers come in and then they disappear. But there is music. And so you are a kid, it’s like a festival, you are hanging around the place all day. And now when you watch the finish on the Champs-Elysees in Paris, then you can’t blink because they go around like two or three times. But really, if you miss it, you miss it.
Mark Stiving
Right. So, hey, let’s jump into pricing. And before we start on the topic, we’re really going to talk about, let me just ask how’d you get into pricing?
Stephan Liozu
I fell into pricing in 1998. I was working for a company called Owens Corning, and I was the business deployment leader for SAP in Europe. And I was in charge of the pricing module and then worked on the discounting structure and the rebate structure and all these fascinating components of pricing. And then I just fell into it and I became very interested in it. And from there I became much more involved and eventually became a full-time pricing thought leader or whatever you call it, not an expert for sure, but a shaper and.
Mark Stiving
So what about pricing do you think dragged you in?
Stephan Liozu
Well, it’s not really pricing for me. It’s really pricing as a mechanism to drive profit. And my career was actually as a business executive all the way to becoming a CEO. And I realized the power of pricing, specifically performance-based pricing, value-based pricing, because most of the businesses I was involved in were very highly differentiated businesses. And you can do cost-plus. So, I was very intrigued as an executive, and I became very interested in quantification, generalization, and then to the point where I decided to get a PhD on the topic of value-based pricing. And then that was history from there. I just jumped out of the corporate world and focused on that.
Mark Stiving
Yeah. I find this field amazingly fascinating. What we’re going to talk about today is customer segmentation and pricing. I tell you what, let me just toss the softball out. I could tell you as we go through this, I’m going to share with you my frameworks and how I think about segmentation, and I can’t wait to hear your frameworks and see if we can make them align or see where they align. But what do you think of customer segmentation and value-based pricing?
Stephan Liozu
Well, step number two of value-based pricing is about segmenting your customer based on variables that are different from demographics. So, you would use preferences, behaviors, needs and wants. Why do they purchase from you? So it’s customer needs segmentation, and frankly, you can’t give every customer the same level of service, the same level of attention. So you really have to put them in separate segments and I call segmentation, for me, a cost saving, cost optimization process where you’re going to allocate your resources better based on what the customer, why the customer is buying from you. But this is, again, one of the foundations of value-based pricing is, two, good customer segmentations.
Mark Stiving
Yeah. I often think at the lowest level for me, segmentation there’s two basic types. There’s one type that says, I’m going to charge two different prices for the exact same product. And so think of seats in an airplane, right? And then there’s segmentation that says, I’m going to create different products so that I can charge different amounts of money to people who have different willingness to pay. And so, think about first class versus economy in an airplane.
Stephan Liozu
Yeah. I think, I look at segmentation and for me, it’s all about reuse. Try to reuse as much of your existing product assets across segments. It’s a little bit about platform thinking. You may have a good, better, best type of a platform thinking where you have modules that you add. It’s also creating bundles, so as you mentioned, the same product, but you have different levels of service and data and software around it. So you’re really creating more full offers versus the bare product, depending on what the customer wants. Do they want the full service? Do they want just a product? And really at the end of the day, this is why you need to understand the reasons they buy from you.
What exactly do they want? Do they want service? Do they want quality? Do they want a price? And and unfortunately, when you look at the methodology of value-based pricing, it’s one of the most neglected step is, hey, either I do at the customer level, which is impossible to do for 2000 customers, or I do one-size-fits-all, I’m going to do one value model for the entire customer base. So you would start at the customer level, but very quickly, you have to elevate your classification work at the second level. It’s one of these steps that is rather difficult. But there’s so many types of segmentation. So when I do training on segmentation, I have to remind my audience that there are six types of segmentation, and you have to know which one you’re doing. So, between strategic segmentation, price segmentation, product segmentation, market segmentation, it’s not the same. And you have to choose the right one, which in value based pricing is customer segmentation.
Mark Stiving
So, define customer segmentation from what you were just talking about. And by the way, I want to hear about all six, right? But specifically, what is customer segmentation?
Stephan Liozu
First of all, the word customer refers to a population. So how do you define your population, right? So your population for me is, so there are different ways of doing a segmentation. It could be active customers only, it could be active and passive customers. It could be your current customers, plus the prospects and the lost customers. So, and pretty much I define that as the list of the population of potential buyers for you, right? And that includes lost prospects, current, whether they’re active or inactive. So it’s your entire customer population. Now, I’ve done segmentation for active customers only.That’s possible. It’s more of an account segmentation if you ask me, and not a customer population segmentation. So these are questions that I ask my clients who want to do segmentation work, what exactly you want to do, because if you are only addressing 50% of the market, it’s not really a customer segmentation. It’s going to be your account segmentation, active account segmentation which is different from market segmentation.
Mark Stiving
Yeah. So as you were describing that, here’s what came to mind or jumped to mind quickly for me, and that is, in the world of SaaS, we often have new customers. So people who’ve never bought from us before. And I would treat them very differently from existing customers that I’m trying to upsell or cross-sell new products to because they’re my current customer base or even existing customers who I want to keep from churning because their usage is low. And I would think of that as customer segmentation. Does that fit in that description for you?
Stephan Liozu
Well, theoretically when you segment a customer base, so you look at your TAM and your addressable market, and you would say, well, this is a population of my target population, right? And obviously, you have an existing customer base, but you’re going to try to project what’s existing outside in the market by doing your customer profiles, your ideal customer profiles and all that good stuff. And then you find new customers and you qualify them as they come in. Are these going to be value buyers, price buyers? Are they going to be buying the full suite, the enterprise suite, or they’re going to buy only a base on the module, good, better, best type. But, for me, I see that process as an integrated process where you industrialize your qualification and increase the velocity of your sales engine. but you need to qualify fast. And your prospects become part of the base, right? And then you learn, obviously you have cohorts and you learn more as you’re doing, and adjust when your potentially new segments come in, it’s for both. I mean, I would say it’s a population that you’re segmenting,
Mark Stiving
Okay. I recently started thinking to myself, I don’t really care about pricing. I care much more about value. And so if I were to ask you to sprinkle value onto your customer segmentation, how would you do that?
Stephan Liozu
Well, typically when you start the process of your customer segmentation and now I define customers as the population prospects and current accounts. I would always look at the value and price spectrum. How do they position themselves? Are they value buyers? Are they price buyer? And then even within the value buyers, are they more technical value buyers or the full value buyers where they want the full experience? So the first discussion I have with my client is, try to think about these two extremes in the spectrum. because chances are, there’s always going to be, these two dimensions are going to be very important in the market, in the customer base. And in between the two, you will have other types of segments like the partnership seekers, the quality seekers, maybe the service intensive customers.
So whatever it is. And usually I go anywhere from three to eight segments that you can manage through a, what I call a data enriched qualitative segmentation. And then at the end of the day, when you look at your segments, you will have different intensity of their value requirement and value perceptions. And that’s where value for me is quite important. because you need to find these segments that will be extremely sensitive to your value strategies, your value messages, and usually it will be around 15 to 25% of your population. The rest might be more price sensitive at different degrees of price sensitivity.And this group of value buyers whether they are aspiring value buyers or key value buyers, value partners, whatever you call them, this is where your resources are going.
This is where, when you start looking at how I service these accounts? How do I manage them, how do I sell to them? What is my cost to serve considerations? This is where I’m reallocating my resources. Because in theory, they are the one willing to pay for the value delivered to them. So it’s a reallocation of resources, but you need to understand what they value, why they value it, and how much of that value they are willing to pay for. And you have to find these 15 to 25%. This is the rule of thumb. You will have anywhere between 40 and 50% of price buyers, and then 15 to 25% of value buyers in any customer population.
Mark Stiving
Okay. So you and I define or think of value slightly differently. I’m sure we don’t, but when I say sprinkle value on top, I always, in my head, buyers trade money for value, period, right? So even a price buyer needs value before they’re going to give us money. And so the question in my head is always, well, what is that value? How much value do they need? How do I define that value?
Stephan Liozu
Yeah. So for me, the price buyer, the value is the price reduction. It’s a short-term savings and value becomes, hey, how much can you save me today? Right? And that’s through the discount where a value buyer is, hey, what’s my long-term value? What’s my ROI, what’s the share of the value pool I’m going to get? So now that doesn’t mean that price buyers don’t have any other needs. This is what I do. Kind of a spectrum of price buy. You have the kamikaze opportunistic price buyer, and you have strategic price buyers and, maybe there are extremely price sensitive, but they also look at product quality, for example, right? So the spectrum is different for every account. This is why I believe in qualitative segmentation with data supporting it. And then you have to find these nuances in these categories of customers that, like you said, some price buyers may want something else than just a short-term discount. There are different behaviors there in price buying.
Mark Stiving
So what do you think of market segmentation and how is this different?
Stephan Liozu
Well, for me, market segmentation is what verticals I am going to embrace. So if you’re a SaaS company and you say, well, I’m going to work on healthcare, I’m going to work on automotive and I’m going to study the end use application that I can pursue. So you would do a prioritization metrics for specific end use markets and applications within the end use. And that would become my overall market, target, right? So this is where, in my definition, and I’m not saying I’m extremely right, but markets are different from customers, right? And the market is all about my priorities on where I want to play, right? Look at IoT. If you do IoT, there’s potentially thousands and thousands applications you could use IoT in, now you’re going to look at verticals and you’re going to look at applications that you could use IoT for, and that’s going to be your core market. Because it’s very important to focus on your most attractive end use. And then from there, you would go into listing the potential customers. What’s my ideal customer profile within an end-use application? So if you say oil and gas, predictive maintenance, well, what’s my ICP? Right?
Mark Stiving
Yeah. I think in this one, we a hundred percent agree in the sense that defining your market segments upfront allows you then to make some really good decisions about, I’m going to create a different package for this market segment versus that market segment. I’ll use different pricing metrics, I’ll use different marketing messages. So definitely wanting to understand that market segmentation first. Which is very different from customer segmentation, price segmentation, how, whatever else you want to look at there.
Stephan Liozu
Yeah. And even strategic segmentation, when you look your your long-range plan, your long-term strategy, your, you may have strategic positions that you want to take. You may say, for example, I don’t want to play in Asia, all right because it’s too dangerous, or it’s too far, or I don’t have the skills, or I don’t want to play in infrastructure markets because, so you’re defining the sandbox of your strategic long range plan. So these are, all those different types of segmentation that frankly, you go in companies, they use them, everything is segmentation. And I think it’s important to educate them on the various types of segmentations. And we haven’t mentioned product segmentation, segmenting your market on the type of products. It’s not that they’re wrong, it’s just different things.
Mark Stiving
What do you think about product segmentation? I usually think of product packaging as a response to how I want to do segmentation, not that I’m segmenting my products.
Stephan Liozu
Makes sense. Yeah, that is correct. I mean, but, if you look at in the equipment business or pure product business, we will look at light products, heavy products, or what customer needs a heavy product, what customer needs a light project or a product. So, I used to do a lot of work in the defense and military sector when I was with Thales, and we have all the land customers who want the small waiter and the air customer who wants a say. And, like you said, product is a result of the segment and not vice versa. And if you have land and sea customers that are value buyers, then they want to buy all of it. How do you handle this? Right? So, but if you’re dealing with engineers and product managers, it’s a switch. They’re very structured, but they’ve used product segmentation or technology segmentation for a long time, and now we’re telling them to think about behavior, think about needs and preferences, how they buy, the frequency of buying. And it takes a while to convince them.
Mark Stiving
Yeah. I think what you’re saying isn’t just limited to hardware companies, but we see it a lot in hardware companies. Yeah. That is that we focus so much on our products that we stop focusing on the market, we stop focusing on the customers and software, I think they focus a little more on customers only because the products can change quickly and in hardware they don’t change quickly. It’s like, hey, it took us a long time to build this design, get it developed and into manufacturing.
Stephan Liozu
So what I see more in software, along the scaling, they’re creating a monster or one-size-fit-all monster of a software that is not adaptable or you can create these different modules of it. So we don’t think in terms of modules. I’ve seen many software companies that have helped with segmentation, and when I asked him, can you feature gate this? Can you separate that? And they can’t, the engineering was done in the product so that it’s one platform and it becomes super complicated for some customers that may have low maturity or they don’t need the entire package. And then it’s difficult to do good, better, best. You could do usage with tiers, but when you get into good, better, best, they can’t restructure the product. And it’s a limitation. It’s a real limitation in software. So when they design their product roadmap, I really encourage them to look at, think in terms of platforms and modules.
Mark Stiving
Yeah. And by the way, they often can’t do usage because they didn’t program in the fact that they’re going to monitor usage in their software package.
Stephan Liozu
Yeah. But you could add a licensing and entitlement package or kind of a metering system that will help you, but at the end of the day, you’re still going to sell the whole solution and you’re going to have a huge adoption issue. And I see that, too complex customers don’t adopt it, then they don’t ramp up scale and then they churn.
Mark Stiving
Yeah. So the two recommendations I always give to software companies development is monitor usage and, and gate all of the features. Right?
Stephan Liozu
Right. That gating is essential.
Mark Stiving
Because it makes it really easy for us to create new packages if we have it gated, and if we don’t, it makes it practically impossible.
Stephan Liozu
Yeah. And that’s for redesigning it completely, which we don’t want to do. This is why I would say most companies have started, they do business without segmentation. And now we’re asking them, okay, you move to value-based pricing, or you’re going to move to a different packaging strategy. And they’re constrained. They’re constrained by their existing structure, by their engineering and product design and whether it’s equipment or software or, you name it. And it’s difficult to go back and redesign products. So then, how do we do this? Through the innovation process, try to do engineering in a different way. But it’s complex and I’ve seen great segmentation strategies that cannot be operationalized for that reason. And I ask engineers, dumb down the product, make it worse. And you look at me, I cannot make a product worse. Not going to happen in my culture.
Mark Stiving
Yeah. One of the things we used to do in semiconductors quite a bit is we would ship the exact same semiconductor with a different spec sheet, a different data sheet. It doesn’t matter if it actually ran faster than we said it did, we just said it ran this fast. and so you didn’t really have to change the product, you just had to change what you committed to.
Stephan Liozu
Yeah. So, like you said, you could use the same product, different, maybe, the tolerance levels or the quality levels you make them a little different. warranties are different, but more and more procurement teams are very, very smart. they’ll be able to reverse engineer your products and study your data sheets and conclude it’s the same. now in some less sophisticated, more fragmented market, maybe they’re not able to do this. So it depends on the sophistication of your markets. And then you give away a lot of cost potentially to customers who are not willing to pay for it, and you give the same product as long as you can reduce the cost to serve on service and maybe, supply chain that yeah, maybe there is a potential opportunity there.
But if you give the exact same, then you’re going to have margins different that you’re going to have to explain. I do quite a bit of segmentation. It takes a courageous C-suite and go-to market leader to do this because you are really looking at your entire go-to market and including, what you sell, how you sell all your service rules, your cost to serve, allocation, all that stuff. And I’ve only seen in my experience, a few companies are able to go all the way to really operationalize good customer segmentation and include it in the E-R-P-C-R-M and all their automation engine there. And most of the time they cannot be operationalized because of lack of courage or tech, lack of systems or too manual processes, and are too manually driven.
Mark Stiving
Yeah. What I often do, and I deal with small and mid-size companies mostly, and what I often do with my clients is I say, let’s go find one market segment. Let’s find a market segment that has a higher willingness to pay than we’re getting today, and see if we can craft the right product portfolio, the right products, the right messaging, and go after a single market segment. Keep doing what you’re doing for everybody else, but let’s go after one market segment. And that success then leads to, okay, now we can go do that again.
Stephan Liozu
Yeah, that builds confidence for sure. give them a roadmap to operationalize it. I’ve worked with micro SaaS companies that are starting, and it is just, we look at the market and the segmentation is it’s such a big space and it’s very difficult for them to really contextualize, where are we going? There’s so many applications and so many, and different ways of looking at markets. Whether you want to be an enterprise, a P-L-G, S-L-G, you want to be an enterprise player or full solution. There’s so many options that I think, what you’re saying is important. Pick one market, focus on it, find your ICP and then get a few logos , see what happens, the friction in the selling process, your ability to get price and not do a segmentation that is going to boil the ocean because we keep going back to it and then changing it and not much gets done.
Mark Stiving
Yeah. And two other quick comments. One, I often find that people are afraid to focus on a market segment because that means I’m not selling to everybody else. Right. And so that’s hugely painful. And number two, I don’t see this as a problem. People don’t usually do this, but I would never recommend it. And that is, when you first launch a product to go after multiple market segments, it’s like, pick one segment, go after it. Be successful.
Stephan Liozu
Yeah. And that’s the F word, right? The other F word.
Mark Stiving
Focus.
Stephan Liozu
Following the shiny object for every lead is a good lead. You do your marketing lead management and all these leads that come in and you just want to quote for them, and then you customize, and then you do demos that shouldn’t be done, and it just slows you down. And I see more and more companies going stealth, and focusing on one market segment and then not publishing to the world, not attracting all these potential leads and going stealth into a segment and then see how it goes. But focusing is the number one priority. And this is where most likely the founders will be, oh, we need to sell, we need logos. Let’s go and find them. And then exactly what you’re saying, it’s all over the map. It’s distracting. You’re changing, you’re customizing over customizing your product and you’re losing that structure. So I would tell them, let’s speak at least two or three. Let’s not go everywhere, but let’s say no to a lot more opportunities and focus on that segment,
Mark Stiving
So I would highly recommend against customizing any product, by the way, period. That’s the end, right? Don’t customize it unless that’s your business as custom products. And number two is when you focus, this is one of my favorite lines, when you focus on a market segment and somebody in a different segment comes to you and says, can I buy your product? You’re allowed to say yes. The whole point is we’re not focusing on chasing them, building products for them, marketing to them. It’s like you could still sell to them when they come to ask. Yeah. Just don’t customize for them.
Stephan Liozu
Yeah. But then that assumes that your product is ready. And most startups will still do product development as they sell, and then they get that feedback from all these accounts we shouldn’t sell to, and then do things for these because we need the logos. Right? So it’s kind of a chicken and egg. And it cannot be perfect. It’ll never be perfect. But you need to understand your addressable market, your heart of your segmentation a little bit so that you could position yourself in a way. And it goes back to the customer problem: you’re solving the attractiveness of the market segment based on that problem, the willingness to pay of that market segment. And you probably know that, but not many startups are actually having that discussion. In depth and validating through research.
Mark Stiving
We are running out of time. So let me ask you the final question. What’s one piece of pricing advice you’d give our listeners that you think could have a big impact on their business?
Stephan Liozu
Do the value work first and then worry about pricing. So, value-based pricing is 90% value, 10% price. So, if you want to do that very well, value first, then price.
Mark Stiving
Actually I love that line, value-based pricing is 90% value, 10% price. So nice. Stefan, thank you so much for your time today. If anybody wants to contact you, how can they do that?
Stephan Liozu
DM me on LinkedIn, connect with me, and that’s the best way to get me.
Mark Stiving
Excellent. And to our listeners, thank you for your time. If you enjoyed this, would you please leave us a rating and a review, and if you have any questions or comments about this podcast or pricing in general, feel free to email me, [email protected]. Now, go make an impact!
Mark Stiving
Thanks again to Jennings Executive Search for sponsoring our podcast. If you’re looking to hire someone in pricing, I suggest you contact someone who knows pricing people contact Jennings Executive Search.
